8.3 Group Life Insurance Underwriting and Conversion Rights

Group Life Insurance Underwriting and Conversion Rights

Group life insurance covers many people under a single master contract issued to the sponsor (usually an employer). Individuals receive a certificate of coverage, not a policy. The group policyholder (employer) owns the master contract; the employees/members are the insured parties.

The dominant product is group term life — temporary, no cash value. Underwriting differs sharply from individual life: the underwriter evaluates the group as a whole, not each member, focusing on the characteristics of the group rather than individual medical histories.

Group Underwriting Principles

To prevent adverse selection without individual exams, group underwriting relies on several safeguards:

Participation requirements: noncontributory plans (employer pays 100%) require 100% participation; contributory plans (employees share cost) typically require at least 75% participation.

Benefit Formulas and the Section 79 Tax Rule

Benefit amounts use a nondiscriminatory formula — a flat amount, a multiple of salary, or by class. Because amounts follow a formula, individuals cannot select against the insurer.

Under IRC Section 79, employer-paid group term life up to $50,000 of coverage is a tax-free benefit to the employee. The cost of coverage above $50,000 is imputed income taxed to the employee using the IRS Table I rates.

Worked example: An employee receives $150,000 of employer-paid group term life. Only the excess over $50,000 — $100,000 — is taxable. If Table I for the employee's age is $0.10 per $1,000 per month: 100 units × $0.10 × 12 months = $120 of imputed income added to the employee's W-2 annually.

Conversion Rights

When group coverage ends (termination of employment or of the plan), the insured generally has a conversion privilege: the right to convert group term coverage to an individual permanent (whole life) policy without evidence of insurability (no medical exam).

Key conversion rules:

• The conversion window is commonly 31 days after coverage ends.
• The new individual premium is based on the insured's attained age and standard rates — usually higher than the group rate.
• Conversion is to a permanent plan, NOT to another term policy.
• During the 31-day window, the insured is covered even before applying — if the person dies during the conversion period, the group death benefit is paid whether or not conversion was completed.

Continuation, Portability, and Common Group Forms

Some plans add portability (keep group term at group rates after leaving) as a separate option from conversion. Federal COBRA applies to group health, not group life, so life conversion is the main life continuation route.

Common group sponsors include employers, labor unions, trade/professional associations, multiple-employer trusts (METs), and credit groups (group credit life covering a debtor's loan balance, payable to the creditor). Group credit life cannot exceed the outstanding loan balance and decreases as the loan is repaid.

Scenario: Conversion Math and Timing

Maria has $80,000 of group term life through her employer (noncontributory). She is laid off on March 1. Coverage ends, opening her 31-day conversion window (through about April 1).

• She may convert up to her group amount to an individual whole life policy at her attained-age standard rate, no medical exam.
• If she dies on March 20 — within the window — even if she has not yet applied or paid, the insurer pays the $80,000 group death benefit.
• If she lets April 1 pass without converting, she loses the guaranteed-issue right and must apply with full underwriting for any new coverage.

Probationary and Eligibility Periods

Group plans use two timing windows the exam tests:

• Probationary period — a waiting time (e.g., 30–90 days) a new employee must work before becoming eligible to enroll.
• Eligibility (enrollment) period — usually 31 days after eligibility, during which the employee may enroll without evidence of insurability.

An employee who declines during the eligibility period and later wants in is a late enrollee and must usually provide evidence of insurability. This rule, plus minimum participation, is how noncontributory and contributory plans defend against adverse selection without individually underwriting each member.

Dependent Coverage and Beneficiary Rules

Many group plans allow dependent life coverage — a small, flat benefit on a spouse or children (e.g., $10,000 spouse / $5,000 child). The employee remains the beneficiary of dependent coverage; an employer generally cannot be the beneficiary of an employee's group life unless permitted as a key-person or business arrangement.

When the master contract terminates entirely (not just one employee leaving), affected insureds still receive the conversion privilege. The employer must give notice of the conversion right; if proper notice is not given, the conversion window may be extended under state law so the insured is not unfairly cut off.